The imminent Facebook flotation, the strategic challenges ahead and the impact on the technology industry.
Facebook Inc (NASDAQ:FB) will need to generate annual revenue of $30-$40 billion in order to justify the likely IPO valuation of the business. This is a ten-fold increase over the revenues that it currently generates.
The question is "where from?" Advertising is fundamental currently, and Facebook will have to channel ad dollars away from other players and onto its platform to achieve this. Enhanced services to companies would also be a logical step.
Where next for Facebook strategically?
Facebook to date is a consumer-facing business – and is in effect the biggest and most successful vanity publishing project of all time. It has a user base with the population of a continent – the first digital continent.
The question for management is "where next?" One logical direction would be the enterprise market – looking at ways in which Facebook can be at the heart of employee-to-employee communication and collaboration. A business like Yammer, which operates a private social network service for businesses, is a good model for what Facebook For Companies could evolve into.
The importance of the Facebook ecosystem for valuations of tech businesses
Businesses that leverage the Facebook platform are already attracting much higher valuations - in some cases 3 times what they were worth only last year. This includes European companies as diverse as Spotify, Unruly Media and Engage Sciences.
We expect many companies that work with Facebook to be preparing for an exit or fundraising in the next 12 months to take advantage of this. Investor sentiment can change in a very short period of time and many will be focused on avoiding any potential downstream risk.
How revenue per employee has changed in a generation
Facebook is a business that can succeed with far fewer employees than the technology behemoths of old. Facebook’s IPO filing implies a value per employee for its own business of $33 million. Microsoft, by contrast, has a value per employee of $3 million, reflecting the fundamental structural differences between the businesses.
How the speed of revenue generation has increased
The internet has unleashed unprecedented potential for a new breed of super-efficient companies, untrammeled by costly infrastructure, to accelerate revenue generation. Microsoft went from zero to $1 million revenues in 3 years ($3.6 million in today's terms). Facebook, by comparison, went from zero to $150 million revenues in 3 years, representing a 40-fold acceleration in real terms. This will only get faster for the right idea.
The impact on mobile networks as Facebook goes increasingly mobile
Facebook is a classic example of an over-the-top technology – a business that exists on top of a preexisting infrastructure. Microsoft went over the top of IBM and Skype went over the top of traditional telcos. Facebook is exerting similar authority and much of the downward pressure that it will inflict will be on mobile networks.
Nokia’s announcement of low-cost smartphones aimed at the developing world will increase the impact that Facebook’s traffic will have on network capacity. Network operators are rapidly becoming the digital drug mules of our age.
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